Thursday, September 1, 2005

Sorting Out the Bayou Securities Mess

The mess at Bayou Securities just keeps getting murkier.  The Arizona Attorney General seized $101 million from a Wachovia Bank account because it appeared to be part of a larger fraud, and that looks like a lucky break for investors in Bayou's hedge funds who might get a little money back, although not any time soon.  A Wall Street Journal article (here) notes that the funds seized by Arizona appear to be part of a series of withdrawals of $160 million from Bayou's Citibank accounts that traveled to accounts in Germany, London, Hong Kong, and then back to the U.S.  Once the Arizona AG moved on the money, Bayou founder Samuel Israel III filed a claim to the money in state court, asserting ownership of it on behalf of Bayou Fund LLC, a hedge fund he helped manage. 

Mr. Israel told investors that the hedge fund would be closing in July because of his impending divorce, but shortly after that announcement one of the fund's investors went to the firm's Connecticut office and discovered a purported suicide note written by the firm's chief operating officer, Daniel Marino (no, not the former Dolphins quarterback) asserting that the hedge fund was largely fraudulent.  Thankfully, Marino did not commit suicide, and the veracity of the note is no doubt under investigation by federal and state authorities looking into Bayou's finances.  Israel has not communicated with investors since his July announcement.

Now, Israel's Arizona counsel has filed a motion to withdraw from the case because of "ethical considerations and concerns" and that his client may not have been forthcoming about "material information," in addition to the client's failure to pay fees.  I suspect that's a nice way of saying the client may have used the lawyer as part of a fraud.  Look for the investigators to pursue a crime-fraud claim to obtain information from the attorney about his communications with Israel and others at Bayou, on the ground that the $101 million was part of a larger scheme to defraud and Israel's claim was an attempt to get control of the money for his own purposes.  This one won't get any less complicated until someone decides to cooperate and give investigators a roadmap to where to find the money, if there is any other than the Arizona kitty.  At one point, Bayou claimed to manage $440 million, but it's unlikely there is anything near that amount available.  As the law suits pile up, and criminal cases get put together, investors should not hold their breath waiting for any return of their investment. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2005/09/sorting_out_the.html

Fraud, Investigations, Legal Ethics | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341bfae553ef00d8351e71ac53ef

Listed below are links to weblogs that reference Sorting Out the Bayou Securities Mess: